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June 6, 2013 6:54 pm
It used to be so simple. Put a dollar in a money market fund and get a buck back. But come the financial crisis the Reserve Primary fund “breaks the buck” and investors stampede out of money market funds. Suddenly the veil is lifted on the risks to savings vehicles once seen as synonymous with cash.
Hence, regulators have been trying ever since to reform these funds, which hold nearly $3tn in the US alone. This week, the Securities and Exchange Commission proposed two alternatives. One would require “prime” funds that invest mostly in corporate securities and target institutions to redeem and sell shares based on current, market-based or “floating” net asset values. (Retail and government debt money market funds did not see big outflows in the crisis.) Or any fund that would not buy primarily goverment debt would have to charge redemption fees in times of extreme withdrawals and even freeze redemptions. The SEC, after a comment period, could also adopt a combination of the two.
Money market funds have sought to maintain stable share prices of $1 and had the regulatory cover to do it. They buy mostly highly rated and liquid securities with short-term maturities, a pool that is not meant to fluctuate. And, rather than mark to market daily, money market funds are able to value holdings at cost plus the amortisation of premiums and discounts and then round to the nearest penny, meaning the fund need only to stay at 99.5 cents or above to not break the buck. The new rules call for prime institutional funds to be valued using market-based factors, while NAVs would be rounded to the fourth decimal place.
The industry has lobbied hard against challenges to its stability and liquidity, which have underlined the funds’ popularity. At the very least a floating share price would be a welcome admission that these funds are not risk-free, but investors should know that is true of all money market funds.
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